Barings: insurers should home in on IG CLOs
Insurers should consider reviewing the role investment grade (IG) collateralised loan obligations (CLOs) can play in their portfolios, whether through a new allocation or as part of an ongoing asset allocation review, says alternative asset manager Barings in a research note.
Against a backdrop of regulatory change and broader market evolution, the authors of the report say IG CLOs can serve as a flexible and increasingly important component of the insurance investment universe, provided they are properly structured and managed.
“With compelling developments on both the supply and demand sides of the asset class, now could be an opportune time for insurers to review where IG CLOs can improve portfolio outcomes and how best to implement them within their accounting, capital, liquidity, hedging and governance frameworks,” note Ruolin Wang, director of insurance solutions, and Bo Trant, client portfolio manager for global CLOs, at Barings.
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Recent regulatory changes in Europe and the US are set to make senior IG CLO tranches more capital efficient for insurers.
Meanwhile, the CLO market is attracting a broader range of investors beyond traditional institutions, such as banks, pension funds and insurers.
In addition, Barings says secondary market liquidity in IG CLO tranches has improved materially in recent years, making the asset class increasingly accessible to insurers as part of their core public fixed income allocation, rather than solely as an alternative investment.
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Within an insurance portfolio, IG CLO tranches carry a number of benefits, including a spread premium relative to IG corporates, regulatory capital efficiency, strong liquidity and potential diversification benefits when allocated alongside traditional IG corporates.
The safety of the asset class also plays a role. Following the Global Financial Crisis, CLOs issued from 2010 onwards have generally featured higher levels of credit enhancement, tighter collateral eligibility criteria and more robust structural protections.
